State Incentives & Global Trade – Poor Accountability & Corporate Welfare? — No.

Weak economic performance over the last decade has prompted states to become more aggressive in their economic development efforts to attract foreign firms, investment, and jobs.
Critics argue that state incentives to attract foreign firms amount to corporate welfare.
These critics point to literature denying the benefits of incentives for attracting any firm, domestic or international. They argue that such efforts lack state accountability of public funds. They draw a parallel to weak corporate governance provided by managers and boards of directors. These objections miss the point.
Let’s start with the last point concerning accountability.
The well-known corporate theory of agency declares that managers and corporate officers are agents of the corporation and working on behalf of widely dispersed shareholders. They along with board members have a fiduciary duty to the corporation. The “Business Judgment Rule” imposes a  strict standard of fiduciary responsibility on boards members. However, managers often do what they want in their own interest without meaningful oversight or restriction.
As we all know when equity ownership is so dispersed corporate executives and bankers with the cooperation of the boards become highly overpaid. Just look at the last ten years, jobs were lost by the millions and income inequality grew dramatically.
The issue of corporate responsibility is different from state accountability.
State officials are not overpaid and are out of office after periodic elections. State officials are directly responsible to the voters. To the contrary, corporate directors are often personally selected by the CEO and senior corporate management with only pro forma board elections.
Voters provide local control over state officials. Board members overseeing state incentives are often subject to confirmation by state legislatures. Elected state officials do not become personally wealthy at the expense of state citizens.
States have an obligation to provide education and training to its residents. You simply cannot say that when states work in partnership with a firm, often through a community college, this is not a public good. This model is followed by other countries, such as Germany, with great success. Investing in the skills of labor for the long-term is critical. Correcting the mismatch between new job openings and the workforce is essential.
The recent report Good Jobs First (2011) criticizes state incentives as not providing sufficient metrics in their incentives. This is certainly not true for the state that I’m most familiar with, Virginia. This report complains that specific wage levels and benefits should be required for state incentives. But the imposition of wage and benefit levels  in this case would amount to excessive government intrusion into the private sector in an uncertain time.
There is a difference when a state attracts a corporation or investment from another state or an international corporation from another country.
Leaving aside the domestic corporate relocation, which often make firms more competitive when locating to a more business-friendly state, attracting foreign firms and investment does not raise in anyway the issue of “beggar-thy-neighbor” or race to the bottom. A policy of attracting foreign investment and foreign corporations for economic development is a no-brainer. This is a legitimate function of state government.
States need to become more aggressive globally to survive newer trends in globalization. Providing state incentives to attract foreign firms, trade, and investment is crucial to the revival of the U.S. economy and the creation of new jobs. We all have a stake in it.

About Stuart Malawer

Distinguished Service Professor of Law & International Trade at George Mason University (Schar School of Public Policy).
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